tv Options Action CNBC November 11, 2012 6:00am-6:30am EST
this is "options action." tonight cliff hanger. could american express fall victim to the fiscal cliff. dan nathan thinks so. we have an options trade to quadruple your money in just two months. he'll break down. risk one make five. how would you like to quintuple your money in home depot by the end of the year? it ain't a holiday special. it's carter and coe's option trade. it is the options trade on the big box retailer and they'll show you how you can make money, too. >> why are all the traders banking on the shares. the action begins now. live from the nasdaq market site i'm melissa lee. these are the traders and the best thing you can say right now for stocks is that the market is closed. the worst week for stocks in
five months. fiscal cliff plus earnings equals pain. is a selloff creating opportunities for you. let's find out. the market is in two camps here. single stock stories like disney and group on and fiscal cliff names. how do you navigate this? >> i think you have to be cautious. when we headed into the election the market had pretty adequately digested a weak earnings picture and guidance environment, and then we had the uncertainty come. to me there wasn't a lot of uncertainty about what the outcome of the election was but for some reason, there was a lot of hope built into the market and that was taken out of that. i'm just going to say this. today's action people are breathing a sigh of relief because we are unchanged. that is really, really horrible price action when you consider the damage over the last two days. to me, i think you have to be cautious over the next few weeks because it is going to go back and forth. we are going to hear boehner. the president and this and that. think about what happened today when the president held that press conference. what did the market do? the market dropped in a straight line.
>> it is interesting if we take a look at the options market going into the election is interesting because a lot of premium came out which suggested a great deal of uncertainty it. like you, i was surprised there would be uncertainty. if you look at the longer dated vix those are rising in value and that suggests that people are more uncertain about what's coming in the 60, 90, 120 days from now which is surprising when you consider i thought the election was a foregone conclusion. we should have known the thing to look forward to is the fiscal cliff. why is everybody so surprised about europe and surprised about china? these were all the problems going into the election, same ones coming out of it. >> we don't normally see the market react like this when the president that we expect to see elected ends up being elected. i think dana is right. when he talks about today being disappointing. the s&p closed on the effective low of the day, the last half of the day. the price action was horrible. the vix ended up closing on the high of the day effectively in
the high of the last half of the day. and i really think the vix was telling this week on thursday when the s&p had a horrible time the vix was actually lower. and i think people felt like they had seen the worst of the stock market. but then today on a friday with the s&p higher you would have expected the vix to sell off a little bit and close on the high of the day, a little higher which is disappointing. >> we want to talk about these two camps and walk through what we mean. take a look at the earnings specific stories. you saw these names today. really steep declines here. groupon hitting a fresh record low. jcp ditto. disney down 5%. the worst dragon the dow today. and then fiscal cliff stocks. by that we mean nice run-up year to date or longer than that. people wanting to lock in at 2012 gains and/or a dividend play like at&t, which i've run
up and also provide a yield t. is a double whammy. >> and also defense stocks. so you have the defense stocks which would be directly impacted by the fiscal limitation. >> right. >> you have all three of those. those would all be under pressure. >> this seems like the perfect opportunity if you wanted to sell stock but were afraid of missing out you could use a stock replacement strategy. >> you can use a stock replacement strategy >> we talk about it in the web extra. also you can buy puts. we saw another name that had done really well or a couple of names recently. that is some of the banks. we saw put buyers in bank of america and citi bank today. people who don't want to give away that big run that they've had this year. >> if you take a look at the various sectors that will likely get hit by fiscal cliff concerns dan, you have actually got a trade on a stock that lives at this cross roads. retail being impacted. high end consumer as well as the financial industry. >> it was interesting to me, >> one of the hardest hit sectors were the bank stocks. it had do with four more years
of regulation. some stocks in the financial sector acted pretty decently. american express is one of them. that's what i want to focus on here today. here is the stock up 18.5%. it is used as a proxy for a high end consumer. what do we know about the fiscal cliff? we know from the campaign that the wealthier individuals may bear the burden for getting to the numbers that we immediate to get to. to me i took a look at american express with the stock around 56. the implied volatility seemed reasonable. if you think there will be a rocky period and investors worried about pocketbooks, american express could be a stock to take it on the chin. >> clearly dan is bearish today. he is buying a put spread. it is a common strategy. it is good to crack open the laybook to see how it works. a bearish strategy you buy one put and sell a lower strike put to reduce costs. how do you make money? you want the stock to fall to the strike of the put. that's where you make the most money and where your profits are capped. walk us through the trade. >> i looked out to january.
the volatility at the money two months out is about 22.5. it's been realizing a little over 20 for the last 30 to 90 days. the options look relatively cheap. i bought a put spread to lower my break even. today when the stocks are around 56 i bought the january 2013 my i bought one of the jan 55 puts for $1.80. sold one of the jan 50 puts for 55 cents. it's 1.25. my max risk. my max gain is 53.75. between that and 50 bucks. below 50 i make the pull 3.75 could lose up to 1.25. that's a lot of numbers. you get my point here. a little exposure to the down side. i need about a 10% move in two months to really make some good money on this. >> would you select american express to make a bearish trade? >> it is a good place to make a bearish bet. why is that? everybody is acting bearish which is interesting because the
money center banks are propped up by the policies supporting. passive financial assets. essentially the tangible book value of a bank, those are the things that are elevated. this is more related to the economy. that is where you expect fiscal pressure to be applied. this makes perfect sense. >> i'm more optimistic about consumer names. let's look at the option trade. first of all he is getting long the at the money put. that is fantastic. he is only spending a quarter of the width of the spread. that makes a ton of sense. then when you get to go out more than two months and do that, the whole thing makes a tremendous amount of sense. i don't agree with the stock but if you agree with his point of view on the stock, this is a great thing. >> you have to believe is one or two of the following things. at the high end consumer will pull back on spending, so the transaction volumes will go down or the high-end consumer will have increased defaults or delinquencies. is that critical to american expre express? >> i think americans think about
the fact that they may be paying 2%, 3%, 4% more in taxes. american express make their money on transaction volume. >> the most populated state in the country, california voted in a tax increase with prop 30. you have a lot of wealthy individuals. i carry american express card. does that affect my spending? yes, it does. >> let's bottom line this all. >> as the old adage would say don't leave home without it don't try it in the market. shorting stocks is the riskiest thing you can do. it exposes you to unlimited losses. dan's put spread limit suggests $125 and offers a four to one payout. nice risk/reward there. moving on to the next trade call it the battle of the big box retailers wal-mart and home depot report earnings next week. black friday, of course, just two weeks away. this comes amid a massive storm here in the northeast. how should you repay? -- let's call to the charts. with the man never lifted a
hammer but can spot a good wedge. we are speaking about carter braxton worth of oppenheimer. >> lifted a few hammers but don't know where the toolbox is. >> take a look at a few charts home depot a great winner. almost suspiciously so. meaning, a very persistent up trend. when you are at the top or bottom of the channel you want to fade for a move in the opposite direction. a long term chart. then we'll juxtapose walmart against it. this is home depot now relative to not only where it was at the height of the housing bubble in '06 but where it was when it was at the top of the tech bubble in the dot com era. this is one heck of a hardware store. we think it's overdone. take a look at the same two time frames, home depot compared to walmart. the original chart we were looking at the two-year chart. this is what home depot has done relative to walmart. take a look at the long-term chart since home depot's ipo. here again, walmart, home depot. we would say the more vulnerable if you will is home depot.
meaning it's priced for perfection. >> home depot looks like the better short of the two. if you wanted to go that direction. mike, do you agree? >> yeah. fundamentally, it's a little bit of a stretch. it's a little over two times earnings. that is the upper end. lot of people are pricing in optimism from sandy. the stock has outperformed the s&p since the 26th of october by 4%. you ought to take a look at the 10k goldman sachs report out and what they have said, what they have been talking about is the fact that the repair and remodel business is at the end of the week. in the meantime since the beginning of october we have seen increase in lumber prices of over 10%. 20% of the net comes from lumber. and millwork. you see an increase in the input cost. you might get incremental sales out of that. plus, they still have sales comps to look at from last year, hurricane irene. there is a lot of good news priced in and maybe not bad news. fundamentally i think it might
be a little overvalued here. >> mike is bearish. he is also buying a put spread. we did go through the play book with dan's trade. let's get straight to the trade, mike. >> very simply, i'll do something similar to what dan did. i am going to buy a put spread specifically the january 57.5 puts and then sell the 55s against it for 70 cents. a spread worth 2 1/2 dollars. obviously less than 1% of the stock price gives me a little time for this to play out. i should see decay especially out of the cheaper option after the event. >> dan? >> the technicals you cannot argue with. i like the structure. here is a company trading at 20 times next year's earnings that are only supposed to grow. 14%. and sales are only going to grow in low single digit. it doesn't make a lot of sense to me. if you want to make the short bet it is a great way to do it. i also think it is a decent short of the stock. there is a lot of good news. >> even though you can face a lot of unlimited losses? >> i would never short that stock not even with the american
express money. one thing, i don't try to catch the first 10% of a move. or the last 10% of a move. i think you are trying to catch the first 10% if you put a put spread on here. i would wait until it is below that channel. >> you mentioned home depot is more correlated to gdp as the housing market. do you think we are in the a different paradigm as we're in this upswing and different momentum trade. we could have made the same case. with the homebuilders. they don't make sense. they keep going higher. >> i wonder whether the home builders are getting to be fully valued here. i am taking the remarks directly from the company. this is what the company is saying will drive the success. >> trying to kitchen sink it? >> take a look at what they are doing in china. they closed seven stores in china. does that tell you that there is growing sales there? not really. >> was it a china play? no. >> >> what is baked in the cake is the 4% performance we have seen in a week's time as people are betting on higher sales from sandy. a lot of stores sold out.
they are going to see accelerating sales, but i'm not sure they will make as much money and have as much impact on the valuation. as people think it does. >> you can get pretty much everything at home depot except for stocks versus options. that you can only get here. want to short hd. that carries unlimited risk. dan, take note. stocks can go up forever but can only drop to 0. mike's put spread defines the risk to $50 and can make up to five times his money by january expiration. we will see carter a little later on in the show. in the meantime got a question send us a tweet. the address is@cnbc options. we'll answer it on our one-on-one web extra right after the show on our website. "options actiooptionsaction@cnbm you will find trader blogs as well. here is what is coming up next. the people have spoken. dan is a trading whiz. last month he built a bearish bet on jp morgan but let him cash in on an obama reelection. can he find a way to make more money? find out when "options action" returns. time for pump up the volume.
the names heating up options trader sizzle index this week. they're the only bank with two fractions in their name and investors heard good news this week. they will buy back shares big it back to $475 million. in option traders did buying of their own. going cuckoo over the company's calls and hopes it means money in the bank who is it? the answer when "options action" returns. and you don't want to miss it with thinkorswim by td ameritrade. you get knock-your-socks-off tools, simple one-click orders, real-time paper trading to hone your skills, plus anytime you need it support. ♪ stocks, options, futures, and forex. get your trading on track. thinkorswim by td ameritrade. trade commission free for 60 days, plus get up to $600 when you open an account.
where were options traders pumping up the volume this week? fifth third bank corp. call volume was over 3 1/2 times the average daily volume. welcome back. let's check in on an update on a developing story on lockheed martin. with bertha coombs. bertha. bombshell this afternoon. >> first we had david petraeus resigning because of an improper affair and now incoming ceo, christopher cued sec at lockheed martin, the nation's top defense company resigning. after an investigation showing an improper relationship with a subordinate named in succession. the incoming coo who was going to replace him will replace him in january. marilyn hughson shows they have succession in place that's fairly seamless. >> thanks for that update. time for the upside call. we take a look back on previous winners.
give you the next move. a couple of weeks back dan made a bearish call on jp morgan stock. shares have fallen about 5%. but he has made seven times and here is how. >> on "options action" it's money in the bank. risk less so we can make more and that is just what dan did on his bearish trade on jp morgan. >> if obama gets elected and i know there is a lot of excitement with romney this week i think he gets elected and air comes out of the stocks. >> just going short. >> you can't engage in risky behavior. that is putting main street at risk. >> the president is right. so to define his risk dan bought the november strike put for $1. now to make money, dan needs jp morgan to fall below that put strike by more than the cost of the trade or below $40 by november expiration. but paying $1? really? >> we have more work to do. >> indeed we do. >> show us how to risk less. >> i sold the october put.
>> very presidential, my man. >> so to spend less dan sold the october 41 strike put for 50 cents and created his put calendar. he did something better. made making easier. by buying the longer dated put and the 50 cents selling the other shorter dated put, he cut costs to 50 cents. now instead of needing jpmorgan to fall, he sees profits if the stock falls by more than 50 cents he spent on the trade or below 40.50. by november expiration. but it gets even better. that's because the value of the clip that dan sold will decrease faster than the value of the longer dated put that he bought, allowing him to do something that these guys can only dream of doing, turning time into money. since the trade dan has been proven right. jpmorgan stock turned south
after obama's reelection and this trade has become a winner. everywhere dan goes he is surrounded by a throng of supporters. amid the pomp and circumstance dan don't forget about the trade because "options action's" -- >> just isn't true. >> well one of our biggest fans only wants to know one thing. what will dan do now? >> what a diverse and bipartisan crowd. before we answer the president's question let's see how much money was made. had you shorted jp morgan you would have made about 5%. that's not bad. dan's put calendar cost 50 cents. it can be sold today for 70 cents and that is a 40% return. the first leg of this trade, the october put expired worthless. as dan hoped. he is long that november put which is at the money and decaying. the question now is dan going to clean up the trade and look to roll it or turn it into a put spread. >> our twitter followers saw what i did. last week, after that october put expired i
actually sold a lowered strike put in november and created a put spread. i had that on very cheaply. and today when the stock was down below 40 i took it off. so to me like this is a great way to use options. a lot of people think about calendars and use them for a pure ball perspective. i took a directional view and tried to thread the needle around an event and it worked out just fine. regardless of what you are doing, you are lowering your cost of doing it by choosing a calendar the way i did. >> we have to find out the direction of jp morgan and we have to check in with the master of the charts. carter braxton worth. carter, what do you see for jpmorgan as well as the banks? >> sometimes a stock is literally priced exactly where it belongs. i would say that's the case with jpmorgan. having moved all the way to 44 and pulling it back it is worth exactly, $40.62. we would call this fair money, dead money. >> fair money. at this point, if you are a holder of the bank and you heard
jp morgan was traded where it is valued. >> i would be looking to do overrides here. this is a really important point, too. >> i think if you own a stock and you think it will be range bound those are covered put right opportunities, you own the stock, sell some calls. this is really the way to manage these range bound scenarios and as volatility increases, it increases the amount of return and yield that you get for doing that. that could be a good opportunity to take care of stocks like others in similar circumstances. >> we look for a bank not priced where it should be. i think bank of america and krit i are -- it's tough to add to a winner well. buy calls, limit your risk. don't just buy more stock in situations like that. >> a reminder as we head to break if you want updates be sure to follow us on twitter and @cnbc options and dan does post regular updates of his trades on twitter. if you are on facebook stay posted on our trades at facebook.com/optionsaction.
our thanks to carter braxton worth of oppenheimer. coming up next, the final call from the options pits. and you don't want to miss it with thinkorswim by td ameritrade. you get knock-your-socks-off tools, simple one-click orders, real-time paper trading to hone your skills, plus anytime you need it support. ♪ stocks, options, futures, and forex. get your trading on track. thinkorswim by td ameritrade. trade commission free for 60 days, plus get up to $600 when you open an account.
this baboon doesn't monkey around when it comes to parenting. the hairy resident recently adopted a baby kitten that wandered into her enclosure. zoo officials say the friends are inseparable. though the monkey sometimes steals the friend's food. love will keep them together except when it comes to food. time for the final call. scott? >> all about what to do when your stock replacement strategy works perfectly. >> dan in. >> i think american express can fall prey to the outcome of the fiscal cliff. >> mike? >> i want to buy put spreads in home depot. i want to sell puts in oshkosh giving us an opportunity there. >> looks like our time is expired. i'm melissa lee. for more "options action" check out our website. firstname.lastname@example.org money in motion is up right after this.
and you don't want to miss it with thinkorswim by td ameritrade. you get knock-your-socks-off tools, simple one-click orders, real-time paper trading to hone your skills, plus anytime you need it support. ♪ stocks, options, futures, and forex. get your trading on track. thinkorswim by td ameritrade. trade commission free for 60 days, plus get up to $600 when you open an account.